The Pound US Dollar (GBP/USD) exchange rate dipped as the new week began, as a lack of significant data from both the United Kingdom and the US left the currencies to trade on external factors. Hawkish expectations for the Federal Reserve boosted the US Dollar (USD), while the Pound (GBP) struggled for support amid widespread uncertainty.

At the time of writing, GBP/USD is trading at $1.2726, marginally lower than the same time on Sunday.

US Dollar (USD) Boosted as Fed Likely to Maintain Restrictive Monetary Policy

The US Dollar continued to climb against its peers on Monday as forecasts that the Federal Reserve is not planning to cut interest rates any time soon lent support to the currency. The most hawkish of the major central banks, markets suspect that the Fed may not loosen its restrictive monetary policy until November or December.

Early last week, USD traders were pricing in a possible first interest rate cut in September; however, Friday’s impressive nonfarm payrolls data scrambled expectations as strong labour market conditions suggest stubborn inflation. The US economy added 272K jobs in May 2024 – the most in 5 months, and far more than the 185K forecast.

Neil Birrell, chief investment officer at Premier Miton Investors, remarked last week: ‘The economy is still moving along at quite a rate it seems, which is bad news for anyone banking on the Fed cutting rates soon… After this number, the end of the year might be nearer the mark for the Fed to follow the rate moves in Canada and the Eurozone.’

Needless to say, the US central bank is expected to keep interest rates on hold this week, although the Fed’s accompanying monetary policy statement could shed some light upon policymakers’ outlook. Core US inflation is expected to print ahead of the Federal Reserve’s announcement, at 3.5% for the year to May; Chairman Jerome Powell may argue the case for keeping interest rates higher until inflation declines to the 2% target rate.

Pound (GBP) Struggles for Direction amid Quiet Trading Conditions

A lack of significant UK data left the Pound to trade upon external factors on Monday. Cautious market sentiment lent some support to Sterling in several exchange rates but capped GBP gains against the safe-haven US dollar.

Ordinarily, at times where data is scarce the currency may turn to recent central bank commentary for trading direction. However, as long as theBank of England (BoE) remains committed to silence, it’s difficult for UK investors to gauge policymakers’ plans.

The BoE pledged not to comment upon its policy outlook until after the upcoming UK election, which has inspired some volatility; currently, however, markets seem to be of the opinion that a Labour victory could be GBP-positive due to the party’s pro-growth agenda.

Analysts at JP Morgan commented: ‘Our economists believe that, given the lack of fiscal space, Labour will likely focus on supply-side reforms… Labour have also sought to reassure businesses by ruling out corporation tax increases.’

Elsewhere, traders looked ahead to today’s employment report for hints as to the BoE’s next policy moves. As UK wages are as a driver of service inflation, these will be in focus: if salaries stagnated in the three months to April, the Bank of England may be compelled to review its high interest rates.

In such circumstances, reduced inflationary pressures may bring some relief; but if the UK’s central bank pivots toward a less hawkish outlook, the BoE could appear dovish in comparison to the Federal Reserve. Signs of increased policy divergence between the two banks are likely to weigh upon GBP.

GBP/USD Exchange Rate Forecast: UK Employment, Fed Decision in Focus

The Pound US Dollar exchange rate is likely to trade today upon a combination of factors. Depending upon whether UK wage growth climbed or remained unchanged as forecast, GBP investors may form a picture of the Bank of England’s likely policy response.

Meanwhile, if unemployment stayed at 4.3% in the three months to April, speculation regarding business conditions may be capped. If joblessness increased, however, it may be concluded that restrictive monetary policy is hindering economic activity, putting further pressure on the BoE to reduce interest rates.

US Dollar traders are expected to be focused on the Federal Reserve’s interest rate decision during today’s session. Markets may be hesitant of placing hawkish bets ahead of Wednesday’s policy decision and commentary, subduing USD morale and possibly allowing GBP/USD to climb.